When do you know when it’s time to declare bankruptcy?

Summary:

  • Personal bankruptcy should only be considered as a last resort because it will severely harm your credit score.
  • Contact your monthly lenders and companies and try to work out payment plans that you can commit to.
    If you decide to use a credit repair service, do your homework first to find the best one for you.
  • Do you feel like you’re drowning in debt? The federal unemployment benefit of $600 per week expires at the end of July. If you lost your job as a result of the pandemic and don’t have any job prospects, you may feel overwhelmed with all the bills you’ll have to pay once the available relief programs expire.

It is critical to understand that you are not alone and that there are options available to assist you in managing your debt. Bankruptcy should generally be considered a last resort, but it’s important to understand what it entails before deciding if it’s the best option for you.

What exactly is personal bankruptcy?

Bankruptcy is a legal way to have some of your debt forgiven, but it comes at a cost and can lower your credit score by 200 points or more. When you file a “Chapter 7” bankruptcy, you usually liquidate your assets to pay creditors what you can, and the remaining debt is discharged. It is important to note that mortgages and car loans are not covered by Chapter 7, and you must continue making payments. This type of bankruptcy will show up on your credit report for ten years.

Chapter 13 is typically less extreme. This entails a court-ordered payment plan that can last 3-5 years. This type of bankruptcy will appear on your credit report for seven years from the date of filing.

Please keep in mind that each bankruptcy case is unique, so do your homework to determine the likely outcome for your specific assets. Click here for more information on Chapters 13 and 7.

Bankruptcy should be used only as a last resort. Discover your options.

So, if bankruptcy is generally the last option to consider, what are your other choices?

Check out the following federal programs: The $2 trillion CARES Act package, for example, includes 180 days of mortgage forbearance, which means temporarily suspending your mortgage payments. Check your state and city websites to see what they are doing in terms of financial assistance during the pandemic.

Examine your other outgoings. Don’t be concerned about paying off all of your debts at once. Can you afford to pay only the bare minimum on your monthly bills? Making the bare minimum payments until you can get back on your feet will help you maintain your credit score and gradually reduce your debt.

Don’t just stop paying your bills; try to negotiate with your lenders. If you are unable to make the minimum payments on your car loan, contact your lender, such as your bank, and companies, such as your cell phone provider, to see if they will agree to a payment plan that you are comfortable with. Even after the government assistance programs expire, your lenders may be willing to work with you on an individual basis. They, too, want to be paid, so working out a payment plan that avoids missing payments and piling up more debt works in their favor.

For example, in April, several car insurance companies announced that they would issue refunds to customers as a result of the stay-at-home orders.

Credit repair services can also be beneficial.

Credit repair is the process of repairing and rebuilding your credit score. While bankruptcy can be reported on your credit report for 7-10 years, late payments can also be reported for 7 years.

You can begin repairing your credit in three ways. One option is to do it yourself. A second option is to contact a counselor at the National Foundation for Credit Counseling, the country’s largest nonprofit financial counseling organization. A counselor may be able to help you repair your credit and improve your financial situation.

Working with a credit repair service is a third option. If you decide to seek professional assistance, make sure you select a reputable service. Avoid companies that “demand an upfront payment, do not provide a contract, and/or promise a quick and simple fix,” according to U.S. News & World Report.

You can also check the Consumer Complaint Database on the Consumer Financial Protection Bureau’s website to see if the credit repair company has any complaints.

Keeping your credit safe

Overall, you want to make wise decisions that will put you on the path to financial wellness. Credit Sesame offers free credit score monitoring, as well as personalized recommendations to help you improve your score.

We recognize that this is a difficult time. Do as much research as you can before making a decision, and file for bankruptcy only as a last resort.